Why The U.S. Has Not Yet Gone Brazil

Includes: SPY
by: Paulo Santos

Brazil. Zimbabwe. Venezuela. This is a very select club, where only the very beacons of wealth creation get to enter. The following chart, picturing Brazil's Bovespa in the early 90s, shows just what kind of performance is required (Source: Yahoo Finance).

That's 22500% in 1 year and 6 months. The S&P500 (NYSEARCA:SPY), up barely 30% since November 15, 2012, falls way short. Perhaps not for want of trying, as Mr. Bernanke has been pumping out the dollars as fast as he can. So what went wrong? Why is the U.S. so far behind in this "wealth creation" race?

There might be a simple motive

In those beacons of wealth creation I highlighted, the money the central bank printed got put to use. It fed quickly, increasing government outlays and thus quickly inflated the real economy. In the U.S. no such thing happened. While the money printing eased the financing of a large fiscal deficit, the large fiscal deficit didn't widen further. Indeed, lately it's actually been falling. The money was not used to expand the government outlays substantially - it just helped finance those outlays at a rather stable and elevated level.

Why did this happen?

There might actually be an easy explanation. The roadblock to this marvelous wealth creation that Brazil, Zimbabwe and now Venezuela experienced was perhaps due to their streamlined political institutions, namely the fact that all of them were dictatorships when the wealth creation took place (Brazil already had a democracy in 93-94, but the "wealth creation" had already been set in motion by a military dictatorship right before).

In the U.S., the endless political bickering doesn't let the wealth creation be unleashed. This is made plain to see in the latest debt ceiling debates. Right now, it's the Republicans putting up roadblocks to wealth creation, but if one goes back a few years here's what Barack Obama himself said when on the other side of the barricade:

The fact that we are here today to debate raising America's debt limit is a sign of leadership failure. It is a sign that the U.S. Government cannot pay its own bills. It is a sign that we now depend on ongoing financial assistance from foreign countries to finance our government's reckless fiscal policies. Increasing America's debt weakens us domestically and internationally. Leadership means that "the buck stops here." Instead, Washington is shifting the burden of bad choices today onto the backs of our children and grandchildren. America has a debt problem and a failure of leadership. Americans deserve better.

It's easy to see that in U.S. politics, whoever is not in power at the moment is against the freewheeling spending that true wealth creation requires. As long as this political system stays in place, it's thus likely that the full potential of Mr. Bernanke's well-meaning moves doesn't get to be realized.

Sure, Mr. Bernanke manages some inflation of the stock market and some destruction of the currency - but not nearly as much as he'd be able to do if there was a larger measure of political cooperation.

And that, sirs, is the reason why the U.S. has not gone Brazil yet.

Investment implications

Since the full "benefits" of Mr. Bernanke's policies cannot be attained, this presents a particular challenge. The effects that quantitative easing can indeed produce are just temporary - it inflates assets but not the underlying economy (at least not enough). The end result is that as soon as quantitative easing is removed, most of the asset inflation will be lost over time.

In other words, the party only lasts while the quantitative easing "wealth creation" itself lasts.

This also highlights just how far printing can take the markets if all conditions are met (the government turns the printing into spending, thus feeding inflation). While the present 30% bull market is already atrocious to anyone selling anything short, just imagine what 1000% or 10000% would look like.

P.S. Just think of the potential if the full effects were made available. In Venezuela they're so advanced they even have smartphone apps to track basic necessities such as food and toilet paper. You can't beat that without enough wealth creation.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.